Walid and Associates has EBIT of US$67,500. Interest costs are US$22,500, and the firm has 15,000 shares

Question:

Walid and Associates has EBIT of US$67,500. Interest costs are US$22,500, and the firm has 15,000 shares of outstanding. Assume a 40 percent tax rate.
a. Use the degree of financial leverage (DFL) formula to calculate the DFL for the firm.
b. Using a set of EBIT-EPS axes, plot Walid and Associates' financing plan.
c. If the firm also has 1,000 shares of preferred stock paying a US$6.00 annual per share, what is the DFL?
d. Plot the financing plan, including the 1,000 shares of US$6.00 preferred stock, on the axes used in part b.
e. Briefly discuss the graph of the two financing plans.
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